Cryptocurrency exchange rating service CER has accused Korea-based Bithumb, the world's second-largest crypto exchange by volume, of faking much of its trading volume since late summer 2018.

Analysis of BTC trade volume on Bithumb shows a significant rise on August 25 and drop on November 12.

CER

In September, CER says, Bithumb ranked at the bottom of the top ten global exchanges as measured by CoinMarketCap, at around $350 million in daily trade volume. But by November 11, Bithumb peaked at $4.4 billion, more than 12 times as much. Today, Bithumb ranks second on CMC's list of crypto exchanges as measured by reported volume at $1.4 billion. (Bithumb does not appear on CMC's "adjusted volume" ranking.

The reason, according to CER?

Wash trading, or simultaneously selling and buying at the same time to create misleading and artificial activity.

"Judging from our multifaceted investigation on Bithumb charts we see the signs of trade volumes manipulations, specifically, wash trading," CER marketing lead Gleb Myrko told me via Facebook Messenger. "Having calculated Price-Volume Correlation we came to conclusion that the trade volume performance is not linked to price fluctuation on the exchange."

One example of odd trading patterns includes a 10X jump in BTC daily trade volume in September, which does not appear to be accompanied by fundamental causal factors.

Other examples include strange activity spikes in the first few minutes of the 11AM hour daily that delivered 95% of the daily total volume, and irregular trade volumes that didn't align with price moves, CER says.

Trade activity spikes during the first few minutes of an hour delivered 90-95% of daily total volume, says CER.

CER

In addition, average transaction size ballooned from .21 BTC in the beginning of the summer to a very significant 5.88 BTC, or $37,600 USD, from October 15 to November 11.

Transaction size grew significantly from earlier in the year.

CER

The trades followed an odd pattern, as well. For example, BTC transactions on September 9 totaled an astounding 7,500 in just five minutes. That's 39% of the day's total trades, and 94% of the whole day's volume.

According to CER, other coins showed similar patterns, including LTC, ETC, XMR, ZEC, OMG, and BTG.

One coin, WTC, showed the most intense artificial activity, CER says.

"WTC stands out from all the coins we observed, as it was only listed on the exchange on the last day of August and had the shortest pump period which started on October 28th and lasted till November 11th," CER states in a document shared with me. "For that reason its pump was one of the most intensive. The inflated daily volume of Waltonchain jumped by 350 times from 348k WTC (on average prior to the pump) to 122.5mln WTC (on average during the pump) only to then drop by by 1,450 times in one day from 206.7mln WTC to 141.8k WTC on November 12th."

I asked Bithumb about the allegations, and the company dismissed them out of hand.

"Bithumb is doing nothing to inflate trading volume," an unnamed company representative told me via email. "Bithumb is not selling mining-based coin. Bithumb is trying to get more customers by providing various promotions just like any other company in the world as a normal business."

CER is a service by Hacken Ecosystem, and Hacken offers a "white hat" community token. Concerned that these allegations might be motivated by business concerns, I asked Hacken if the company had ever tried to list on Bithumb.

The answer?

"No, never."

Cryptocurrency experts I spoke to did not find this kind of behavior difficult to believe, though they stressed that to evaluate this specific accusation they would need to review the evidence carefully.

That said, there seems to be little trust in the crypto world ... perhaps appropriate for currency which is supposed to function in a trustless environment. Or, perhaps not.

All of the non-U.S. exchanges are inflating transactions, agrees Brandon Wirtz, CEO of AI company Recognant, adding that many in the U.S. are doing the same ... and using buffers between legitimate buy and sell bids to buy and re-sell coins between the kosher trades.

"It causes volatility and velocity which can be good for 50 percent-plus more traffic," he said.

Crystal Clare Stranger, founder and CEO of PeaCounts, a blockchain-based payroll payments company, says that this is quite possible and even common.

"In the crypto space it is common to follow the adage of 'fake it 'til you make it' and many people grossly exaggerate how successful they are. Many companies have used market manipulators to pump the value of their tokens to look successful, and other exchanges have done this to break into the top ten."

"It is very easy for a centralized exchange to trade dummy accounts off-chain using bots to pop volume," Stranger added. "And as the exchange themselves bear little cost for these transactions, essentially just the computing cost, [it becomes] very tempting, especially with so many exchanges opening in the last couple years. It is a very competitive market."

Another expert suggested that this could be connected to Bithumb's well-publicized hacks in 2017 and 2018.

"Originally the breach on June 19 was thought to have resulted in the stolen crypto being sent to unknown hacker wallets," says Morgan Steckler, CEO at iTrustCapital, a digital currency retirement planning company. "However, if this recent fraudulent transaction data proves to be true, and if Bithumb was able to evade detection through multiple recent audits of their security and transaction protocols, it is also entirely possible that the 39 addresses thought to belong to the hackers actually belonged to the exchange itself."

Several experts did not want to be named.

"Basically, take all the illegal stock trading activites that have been banned over the years and move them into crypto. Why? Because it's the Wild Wild West," said one, who manages companies on both the fiat and cryptocurrency sides of finance.

"Ghost orders are huge ... it's where you open a buy and sell at the same time across multiple accounts, then close off one side of all the transactions (example buy) side and then run with your short position (sell side)."

Another expert suggests that Bithumb may have inadvertently contributed to Bitcoin's continuing price collapse.

"According to data reported by CCN, there is certainly evidence to suggest a strong correlation between the timing of Bithumb’s promotion expiration and the sudden, and for many, shocking plummet that continues to play out across the industry," says Travis Barker, CTO of Dash Marketing and early adopter and proponent of cryptocurrencies. "So far, I haven’t seen evidence to suggest malicious intent. In other words, I don’t know if Bithumb was intentionally or incorrectly inflating volume numbers, or simply running highly successful promotions to that effect."

CER representatives seem fairly certain that there was intentional malfeasance.

"Bithumb has mastered a multi-factored approach to conceal its foul play," says CER's Myrko. "As far as we are able to judge the manipulations were fulfilled via matching opposite orders with the same price or by simply drawing transactions out of thin air, so-called 'painting the tape.'"

The goal, CER suggests, may have been to establish Bithumb as a leading global crypto exchange. The result, however, could be extremely negative.

It "undermine[s] the entire image of the blockchain sphere as an environment of trust and transparency," says Myrko. "Such irresponsible activity makes crypto field less than unwelcoming for the investors and industries who saw blockchain as a new opportunity."

All that said, it's important to reiterate that Bithumb denies the accusations.

CER is planning to publish all of its data -- over 20 pages of charts, images, and documentation of what it considers to be fraudulent behavior.

At that point Bithumb will be able to respond directly to the accusations and, perhaps, offer an explanation.